By JAD MOUAWAD
As Oil Prices Fall, OPEC Faces a balancing act, Venezuela and Iran have put OPEC on notice that they want oil output decreased to keep prices above $100 a barrel. Producers have gotten used to higher prices, which are up 14% this year and have more than quadrupled in five years. OPEC leaders are scheduled to meet next week in Vienna.
The decline in oil prices has been a welcome relief for consumers and a rare piece of positive news in a bleak economic landscape. But for oil producers that have grown accustomed to rising revenue, falling prices are turning into a cause for concern, if not quite panic.
Oil prices have dropped by a third in seven weeks and appear to be headed below the symbolic $100-a-barrel threshold for the first time since March. Though oil remains expensive by historical standards, the speed of the decline is prompting some soul-searching within the OPEC cartel.
Venezuela and Iran, the leading price hawks in the group, said they did not want oil to fall below $100, a price Iran’s oil minister recently said was a “minimum.” Both countries signaled that members of the Organization of the Petroleum Exporting Countries needed to reduce output to bolster prices.
Other OPEC members, like Algeria and Kuwait, fear that high energy costs might jeopardize their exports as the global economy slows. Saudi Arabia, the world’s biggest oil exporter, has not specified a price it considers fair, though King Abdullah has said that $100 was too high.
For OPEC’s leaders, who meet in Vienna next week, trying to manage the decline in prices is tricky. Cutting production at today’s elevated levels could spark a backlash and paint the cartel as greedy. Conversely, leaving production unchanged at a time when demand growth is slowing could precipitate a price collapse, as in the late 1990s.
“They are playing a balancing game,” said Michael Wittner, the global head for oil research at Société Générale, in London. “If prices are too high, they will kill the golden goose and hurt consumption. But at the same time, they see the weakening economy and are thinking the world doesn’t need so much oil right now.”
Oil settled at $107.89 a barrel on Thursday, the lowest level in five months. The drop accelerated even after Hurricane Gustav’s passage over the Gulf of Mexico caused modest disruption to oil and gas production.
Despite a fall from the record high of $145.29 a barrel on July 3, oil prices are up 14 percent this year. They have more than quadrupled in five years.
Drivers are getting some relief as gasoline falls from this summer’s records. If oil drops below $100 a barrel, that would most likely drive gasoline prices below $3.50 a gallon, down from July’s peak of $4.11. Gasoline now sells for an average of $3.68 a gallon. But falling oil prices could jeopardize investments in new sources of energy, whose economics would look less favorable.
Producers have gotten used to the high prices, which have fueled an unprecedented economic boom in the Middle East, Russia and South America. From the gleaming towers of Abu Dhabi to the new cities burgeoning in Saudi Arabia, producers are relying on a petroleum windfall to develop industries, attract businesses and expand their economies.
This year, OPEC’s export revenues are likely to exceed $1 trillion, according to estimates from the Energy Department. The exporters have earned $642 billion during the first seven months of 2008, nearly as much as they did for all of last year.
Demand for oil in the United States, the world’s biggest market, has fallen by about one million barrels a day as a result of high prices, sluggish economic growth and the tight credit market. The economic slump is spreading to Europe, and could also affect Asia, the main driver of growth in oil demand.
At a meeting of producers and consumers in Jeddah this year, Saudi Arabia pledged to keep pumping at full throttle to bring prices down. The kingdom is OPEC’s biggest producer and the group’s de facto leader. At the same time, analysts said, the Saudis realize that if they keep their output at the present level, they will create a glut. The kingdom is pumping about 600,000 barrels a day more than its official OPEC quota of about nine million barrels a day.
Some analysts believe the group may opt for an informal cut in production, reducing output without much fanfare, instead of a formal announcement that could prove politically tricky.
Another option may be to convene another meeting in six to eight weeks and announce a big reduction then. The group is already scheduled to meet in December, but that could be too late to act if prices keep declining.
“The focus of the debate among OPEC ministers gathering in Vienna next week will not be whether there is a need to cut crude oil production, but rather when,” a consulting firm, PFC Energy, said in a note.
Some analysts suspect that OPEC is already trying to prevent prices from dropping below $100 a barrel by discreetly paring production.
Saudi Arabia, for example, has reduced its output in the last month by 50,000 to 100,000 barrels a day, according to estimates. Saudi Arabia, like most OPEC producers, does not provide real-time production figures.
Many questions will hover over next week’s meeting, among them: What is the minimum price that OPEC is willing to defend? Will the cartel prove more effective than it has in the past at keeping discipline among its members?
OPEC’s 13 members account for about 40 percent of the world’s oil production. It does not set prices directly. Instead, its members manage global supplies through production quotas that are periodically assigned to all countries except Iraq.
“While OPEC does not appear unhappy to see oil prices falling back from close to $150 a barrel, the point may be rapidly approaching when that sentiment changes,” according to a recent analysis by the Center for Global Energy Studies, a consulting firm in London. “The danger for those looking forward to more reasonable oil prices is that OPEC, haunted by the price crash of 1998, overreacts and cuts production too sharply.”